Mortgage-Related Debt Versus Consumer Debt
For people in or approaching retirement, there are two main categories of debt: mortgage-related debt and consumer debt. Mortgage-related debt covers home-related borrowing, while consumer debt includes all other types of debts (e.g., credit cards, student loans, car loans).
- Primary mortgage: a method of borrowing to purchase a home
- Home equity loan: a one-time method of borrowing against the equity in a home
- Home equity line of credit: a renewable method of borrowing against the equity in a home
- Reverse mortgage: a method of borrowing against the equity in a home available only to homeowners age 62 and older
- Installment loan: typically a method of borrowing a fixed amount of money for a large purchase, such as a car
- Student loan: a method of borrowing to pay for higher education expenses
- Credit card loan: a renewable method of borrowing for nearly any type of consumer expense (food, gas, health care costs, entertainment, etc.)
Is a Mortgage in Retirement a Good Idea?
Ideally, your primary mortgage should be paid off by the time you start retirement or as soon as possible thereafter. The upside to retiring a mortgage is the elimination of the (typically) largest monthly expense most people have, thereby freeing up cash flow for other needs in later life, such as increased medical expenses. There also is the emotional security of knowing you will always have a roof over your head as long as you pay your property taxes.
The downside to paying off a mortgage may be the loss of other financial assets, such as savings or withdrawals from retirement accounts. Once the mortgage is paid off, you no longer can access the cash you used to pay it off, except perhaps through a home equity loan/line of credit, a reverse mortgage, or selling your home.
In any case, access to cash may be limited by paying off the mortgage early, rather than continuing to make payments over the term of the loan. You also may lose a potentially valuable tax deduction (depending on your tax bracket) for interest payments on a mortgage, assuming you can itemize your deductions on your tax return.